Red State, Blue State

Meanwhile, California took in 4 percent less than anticipated in September, falling $300 million short in September alone and $700 million short for the year.

These numbers offer me a chance to offer up my long-in-gestation comparison between Texas and California.

Both Texas and California share a number of similarities: They are the two most populous states in the Union, both are southern states with warm climates, both have long coastlines and important ports handling international trade, both share a border with Mexico, both have diverse populations and diversified economies, including extensive portions of the agriculture, energy, and high tech sectors.

The biggest difference between the two is their respective governments. Texas, of course, is the paragon of the red state model (low tax, low spending, limited government, non-union) whereas California is the classic example of the blue state model (high tax, high spending, expansive welfare state, closed shop). Texas kept government small, tightened its belt and lived within its means. California spent like there was no tomorrow, jacked tax rates into the stratosphere, and gave generous contracts to public employee unions. Now Texas is doing well and California is going broke.

So what example should America follow, that of deficit-slaughtering, budget-cutting, seriously limited government in Texas, which has added 730,000 jobs in the past decade, or that of regulation-happy, spend-mercilessly, owe-everything, flee-this-place-quickly California, which has lost 600,000 jobs during the same period?

Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the “soak the rich” tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average. Amazingly, these three states ranked 46th, 49th and 50th among all states in the percentage increase in wealthy tax filers in the years after they tried to soak the rich.

High tech employees are fleeing California for Texas, because they can keep more of what they make, the government isn’t going bankrupt, and the roads and schools are now better in Texas. Despite all the money California spends on a a bloated public sector, the actual core services delivered are worse in California than they are in Texas:

“Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California’s government and the middle class is constantly being renegotiated to the disadvantage of the middle class.”

Just how broke California is became apparent in a recent Michael Lewis piece in Vanity Fair. It illustrates who irretrievably broken California’s politics and finances are, and just how little a dent Gov. Arnold Schwarzenegger made in fixing the problem:

David Crane, the former economic adviser—at that moment rapidly receding into the distance—could itemize the result: a long list of depressing government financial statistics. The pensions of state employees ate up twice as much of the budget when Schwarzenegger left office as they had when he arrived, for instance. The officially recognized gap between what the state would owe its workers and what it had on hand to pay them was roughly $105 billion, but that, thanks to accounting gimmicks, was probably only about half the real number. “This year the state will directly spend $32 billion on employee pay and benefits, up 65 percent over the past 10 years,” says Crane later. “Compare that to state spending on higher education [down 5 percent], health and human services [up just 5 percent], and parks and recreation [flat], all crowded out in large part by fast-rising employment costs.” Crane is a lifelong Democrat with no particular hostility to government. But the more he looked into the details, the more shocking he found them to be. In 2010, for instance, the state spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee; in 2010 he’d made $838,706. The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students. Over the past 30 years the state’s share of the budget for the University of California has fallen from 30 percent to 11 percent, and it is about to fall a lot more. In 1980 a Cal student paid $776 a year in tuition; in 2011 he pays $13,218. Everywhere you turn, the long-term future of the state is being sacrificed.

It’s even worse at the local level, where cities are going broke do to outrageous union pensions, such as in San Jose:

It shows that the city’s pension costs when he first became interested in the subject were projected to run $73 million a year. This year they would be $245 million: pension and health-care costs of retired workers now are more than half the budget. In three years’ time pension costs alone would come to $400 million, though “if you were to adjust for real life expectancy it is more like $650 million.” Legally obliged to meet these costs, the city can respond only by cutting elsewhere. As a result, San Jose, once run by 7,450 city workers, was now being run by 5,400 city workers.

Back in 2008, unable to come to terms with its many creditors, Vallejo declared bankruptcy. Eighty percent of the city’s budget—and the lion’s share of the claims that had thrown it into bankruptcy—were wrapped up in the pay and benefits of public-safety workers.